Fragile consumer confidence undermining growth in UK economy

The GfK Consumer Confidence Index for July came in at -17, an improvement on -23 recorded in June. However, persistently weak readings suggest a lack of consumer demand in the economy. Despite considerable improvement from the lowest point of the cost-of-living crisis in 2022/23, these results suggest that many households across the UK are still unconvinced that economic recovery is underway.

Given that household spending accounts for around 60% of UK economic activity, consumer confidence often signals future trends in retail expenditure, business investment, and overall economic growth. Increased confidence typically leads to greater willingness among consumers to make major purchases and spend on discretionary items, while subdued confidence often results in weaker demand for businesses and greater caution regarding hiring and investment.

Households are still exercising spending restraint. Inflation concerns, higher borrowing costs, elevated mortgage repayments, and ongoing uncertainty in the labour market continue to weigh on household sentiment.

The new prime minister and his chancellor must revive consumer confidence while exercising fiscal discipline. This will be a difficult balancing act. Stimulating stronger household spending is vital for sustained economic growth, but this objective must be balanced against the imperative to uphold the credibility of public sector finances.

Measures such as the 20 per cent cut to business rates for pubs, clubs and live music venues may provide a modest boost to both business and consumer confidence. However, the financial markets will also scrutinise any policy decisions that could lead to higher borrowing, particularly given concerns over the sustainability of public finances. UK bond yields have already risen amid concerns about the impact on tax revenues and public borrowing.

Looking further ahead, consumer confidence will improve gradually if inflation eases, real incomes keep rising, and the labour market remains resilient. However, a number of risks remain in sight. Higher energy prices, renewed geopolitical tensions, persistent inflationary pressures, or a sharper slowdown in employment could quickly weaken sentiment again. For Andy Burnham, restoring consumer confidence will be essential if the UK is to achieve a sustained economic recovery.

Emeritus Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA